Lender Overlays

Lender Overlays

Lender Questions

Underwriting Overlays represent one of the biggest hurdles for mortgage applicants. While lenders understandably defend overlays, their existence disqualies viable borrowers and hinders the housing recovery.

Conventional (Fannie Mae and Freddie Mac), FHA, and VA mortgages have strict underwriting guidelines that lenders must follow if the loan is to be insured or guaranteed.

Overlays are lenders’ self-imposed guidelines that go above and beyond the government requirements.

Lenders with overlays might require higher credit scores, lower debt-to-income ratios (DTI), lower loan-to-values (LTV), and tighter appraisal parameters. This makes it much harder for worthy borrowers to qualify.

The results are devastating.

For example, fewer homes are being refinanced which means fewer homeowners are able to reduce their payments, consolidate debt, or get out of ugly negative-feature mortgages. This increases the chance of more foreclosures.

Also, fewer homes are being bought and sold. In order for our recovery to gain traction, the huge inventory of foreclosed and listed homes must be sold. The longer they sit, the longer the recovery will take.

On the surface it seems nonsensical. Our sole collective purpose should be to find ways to responsibly kick-start the housing market. Instead, homebuyers are being turned away even though they qualify under the already strict government guidelines.

Why Impose Overlays?

Lenders impose underwriting overlays to protect against government forced buy-backs. They claim that the government knit-picks qualified loans to find any reason to force lenders to buy them back.

They see it is an attempt by the government to make up for the billions of dollars in losses that government agencies have incurred since the mortgage meltdown began in 2007.

Many observers think it’s an over-correction by the government. After all, basic guidelines were already tightened for all government backed mortgages after the meltdown began.

In many instances lenders are being held accountable for consumer fraud and other items that they had no way of preventing or detecting.

Even “flawed paperwork can lead to pressure from Fannie Mae and Freddie Mac” to buy-back loans “even on performing mortgages,” according to a recent Bloomberg Government article.

Lenders simply don’t trust the subjective nature of these government challenges. Even if they follow the rules they can be forced to buy-back loans.

Enough Already

The housing market is currently battling against a slew of other well-intentioned but crippling government actions. The HVCC appraisal rule, lower county loan limits, higher mortgage insurance rates and overall tighter guidelines have all contributed to the lack-luster recovery.

The forced buy-back of qualified loans is simply another unnecessary barrier.

Luckily, there have been hints that the Obama administration will address the government’s buy-back demands when it rolls out its expansion of HARP.

The goal of this expansion plan is to help qualified borrowers obtain new loans. And while certainly not a cure-all, the elimination of these absurd buy-back demands should reduce the need for lender overlays.

Then, just maybe, the government chokehold on the housing market will loosen and an honest recovery effort can begin.

Meridian Home Mortgage Blog will continue to update our readers on the proposed HARP expansion and its effect on lender overlays.